Keeping a clear view

Author: | Published: 25 Apr 2017

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Julie Hertzberg, of Alvarez & Marsal and
Insol International, examines the balancing act distressed
companies are playing in a modern
restructuring

From her seat at Alvarez & Marsal in the US and as
vice president of Insol, Julie Hertzberg has an inside view on
the key drivers behind the biggest Chapter 11 bankruptcy cases
in the US and a finger on the pulse of turnaround and
insolvency issues worldwide. In a year that has continued to
host large oil and gas sector restructurings, Hertzberg
examines what path these have taken and what priorities they
have had to weigh up. She also examines areas often neglected
by companies and their advisors and the impact that claims
traders can have on cases.

What are the most significant trends impacting bankruptcy
and reorganisation processes today?

Oftentimes, trends and developments are driven by the
industry cycles of bankruptcies. For the last 18 months, oil
and gas restructurings have dominated the marketplace. Many
companies acquired additional cash in early 2015 in
anticipation of the reduction in oil and gas prices. When
prices remained depressed, and companies realised they could
not maintain their current leverage, they had to look at
alternatives to de-lever their balance sheets. For companies
with a US nexus, it was natural to contemplate strategies under
a US Chapter 11 proceeding. By definition, assets of oil and
gas companies are diminishing. Therefore, any Chapter 11 must
prioritise speed as delay could result in a reassessment of the
company's borrowing base and further reduce liquidity.
Considering these facts, most oil and gas companies have
evaluated the use of Chapter 11 for the sole purpose of a
balance sheet clean-up or debt-for-equity conversion.

I would say the recent expansion of the use of pre-packaged
or prearranged bankruptcies is driven by the facts particular
to this industry: sufficient liquidity to obviate the need for
debtor-in-possession financing; the requirement for a quick
in-court solution; and the acknowledgement that most vendors
are critical to running the business, which means most are paid
pursuant to a first day motion. In these cases, the limited
parties which are impaired are solicited prior to or
immediately after a filing. This strategy limits the
operational utility of a Chapter 11 proceeding, for example in
renegotiating contracts, as that process may not be possible in
the context of a pre-packaged or pre-negotiated case.

I also think companies' tolerance for fees in long-term
cases has waned, and advisors evaluate the options they can
exercise outside of a formal proceeding and work to limit the
time in Chapter 11, which can potentially significantly reduce
costs. Obviously, this is dependent upon the reasons for the
need for a Chapter 11 filing.

In addition, the increase of claims traders playing an
active role in buying up debts has altered the landscape.
Depending on the percentage of debt for a particular class of
claimants, the claims trader can impact negotiations to reach a
consensual deal.

Have there been specific developments in North American
bankruptcy or reorganisation frameworks that will or are having
an impact on cases?

The question really must be answered on an individual
company basis and is driven by the circumstances specific to
the company. All three types of restructurings: traditional
filings, pre-packaged and prearranged transactions are
routinely used. The more important question is whether
companies understand the benefits of each scenario, and what
they give up.

Pre-packaged or pre-negotiated cases can be an effective way
to quickly memorialise a fully or partially consensual deal but
it limits the ability of a company to utilise the other
benefits of the Chapter 11 process, such as the unilateral
right to assume or reject contracts or bind parties, for
example litigation claimants, to the in-court claims recovery
process. Therefore, during the evaluation process companies
should be certain that the cost benefit of a speedy and largely
certain process outweighs the benefits of being able to
renegotiate with certain parties or carve off liabilities to
remain part of the estate and not pass to the reorganised
debtor. I have seen companies file a pre-packaged Chapter 11 to
effect a debt-for-equity exchange and ultimately end up back in
a second proceeding because there were operational issues that
weren't addressed in the first proceeding.

What are the most overlooked aspects of managing a smooth
bankruptcy or restructuring process from a company's
perspective?

I would say there are two primary administrative processes
which are often overlooked. First, internal and external
communications associated with the restructuring process and
second, the post-effective date clean-up of the old bankruptcy
estate. It makes sense why both of these work streams may be
overlooked by a company in the first instance.

Companies’ tolerance for fees in long-term
cases has waned

Often, management is so involved in the transaction that
when the time comes to finalise the deal they have been
familiar with it for so long and forget that employees,
vendors, suppliers and other interested parties do not have the
specific details to give them confidence of the sustainability
of the company. This can create an exodus of employees,
discontent vendors who request to do business under modified
terms (such as cash in advance or potentially not at all), or
customers who search for alternative relationships. Early and
carefully constructed messages for employees, media, customers,
vendors and suppliers, governmental officials and other key
constituents will substantially mitigate adverse reactions to
the unknown of the situation. Ensuring consistent
communications and proactive messaging will allow the company
to remain in charge of the tone of the process and send a
message of stability even during this time of financial crisis.
Importantly, the company should not over-promise or guarantee
any outcome; but getting ahead of any potential negative
publicity of the situation will go a long way to reassure
interested parties with appropriate and accurate messaging.

The second area that people do not fully consider is the
post-effective date clean-up of the old bankruptcy estate.
After a company successfully presents its plan of
reorganisation to the court and the court confirms the plan,
the newly reorganised company emerges but the bankruptcy case
cannot close until all the obligations outlined in the plan
have been fulfilled. This may be frustrating to companies which
do not have a full perspective on the workload required to
complete these tasks. Company employees with historical
knowledge are often required to assist with the claims
valuation process. At a minimum, quarterly fees for each legal
entity are due to the Office of the United States Trustee.
Unfortunately, due to the nature of certain claims, such as
potential litigation or tax obligations, this process may take
years to resolve. Few companies fully understand this
additional phase of the process in the early planning
stages.

Advisors can reduce this burden by drafting language within
the plan of reorganisation to more effectively resolve claims
disputes and eliminate some of the non-controversial
administrative hurdles which would ordinarily require further
court intervention.

Looking specifically at claims management, what have been
the most important recent developments in this field?

The most recent development in the claims area relates to
the US Supreme Court ruling in Czyzewski v. Jevic Holding
Corp of March 2017. The Supreme Court ruled (six to two)
in an opinion by Justice Stephen Breyer that the bankruptcy
court, without consent from affected parties, cannot approve
structured dismissals that "deviate from the basic priority
rules" in paying creditors governed by statutory requirements,
not even in rare cases.

The more important question is whether companies
understand the benefits under each scenario and what
they give up

Separately, a recurrent issue which surfaces in many large
cases relates to claims which are purchased by claims traders.
Claims traders routinely purchase claims through the Chapter 11
process and are required to file a notice of claim transfer. In
certain instances, it is difficult to interpret the exact
rights purchased by claims traders. There are instances where a
claims trader will file a notice of claim transfer without
fully identifying all the details of the claim which was
ostensibly transferred. This makes it difficult, if not
impossible, for the company and its advisors to show the
rightful owner or to apportion the claim, where applicable.

Further, there is the debate over what constitutes a claim
which can be purchased. For example, can a claims trader
purchase a right to payment under a first day motion? What if
the purpose of the motion is to induce the creditor who is a
supplier or vendor to honour existing relationships and extend
terms going forward (for example payments made pursuant to a
critical trade motion)? Since the claims trader is not the
underlying supplier doing business with the company, why would
the company allocate its funds to pay this party? These and
many additional ambiguous questions currently require
substantial time to analyse each claim purchased by a claims
trader.

Importantly, there has been a push by many professionals to
draft language in a plan of reorganisation to reduce
administrative steps in managing claims reconciliation
processes which ultimately reduces the cost and time spent in a
formal restructuring.

What are going to be your priority areas over the rest of
2017?

Within my practice at Alvarez & Marsal our team is
dedicated to reducing the time and cost to administer
bankruptcy cases. We are constantly improving the technology we
use to administer cases to limit the professional hours
required to wind down bankruptcy estates once a newly
reorganised company has emerged from bankruptcy. In addition,
as we look at the reporting requirements for a company going
through Chapter 11, we are creating work product for clients
which can be used to help manage their day-to-day back office
operations. If companies are required to compile and report
certain information, they may as well ensure it is prepared in
a way which is beneficial to the company on a go-forward
basis.

In my responsibilities as Insol vice president, I will
continue to fulfil our mandate as a member-driven network
maximising global economic value by improving solutions to
cross-border issues, and advancing restructuring and insolvency
systems through the deep expertise of our members.

About the
author

Julie Hertzberg

Julie Hertzberg is a managing director with Alvarez
& Marsal (A&M) and the head of A&M's claims
management services group, where she specialises in
Chapter 11 case preparation. She also sits on the
executive committee for A&M's North American
restructuring practice and is the vice president of
Insol International, a 10,000 person insolvency and
restructuring member organisation in over 80
countries.

Hertzberg specifically oversees the Chapter 11
preparation and reporting requirements from pre-filing
through distribution, including preparation of the
creditor matrix, drafting of the schedules and
statements of financial affairs, claims reconciliation,
preference analyses, lease assumption/rejection
analyses, distribution processes and all facets of
post-confirmation wind down. She deals with the
complexities of working with the various professionals
and clients integrating the financial and legal
reporting requirements necessary to file a Chapter 11
case.